Fed’s Schmid says tighter policy needed to reduce inflation
Price pressures have risen due to the Iran war and large AI investments
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FEDERAL Reserve Bank of Kansas City President Jeff Schmid suggested higher interest rates are needed to achieve the Fed’s price stability goals, and reiterated that inflation is his primary concern.
“Given the strength of demand and investment, I do not see the current stance of monetary policy as restrictive,” Schmid said on Tuesday (Aug 4) in remarks prepared for an event in Omaha. “As such, I believe that bringing inflation down to the Fed’s 2 per cent objective will require tighter policy.”
Fed officials are divided over how much they need to do to tame inflation, which has been above the central bank’s target for more than five years. Price pressures have risen due to the war in Iran and massive investments in artificial intelligence.
Policymakers voted to leave their benchmark rate unchanged last week. But three Fed officials dissented in favour of a quarter-point rate increase, citing concerns that delaying hikes now could increase the need for more aggressive action later.
Schmid, who does not vote on rate decisions this year, cautioned against assuming that inflation pressures stemming from supply shocks will be fleeting. He said such incidents are more likely to lead to large increases in inflation when demand is also strong.
“I am uncomfortable ever assuming that a burst of inflation will be temporary,” said Schmid. “How persistent a spike in inflation is ultimately depends importantly on how the Fed reacts or is expected to react.”
Earlier on Tuesday, Philadelphia Fed President Anna Paulson said she will keep an “open mind” about the future path for interest rates based on what happens with inflation. BLOOMBERG
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